But Pritchard warns that investors shouldn’t count on profits from the company even though the break-even result from last quarter was better than the 5-cent loss the Street was expecting:

While EPS was breakeven vs. our $0.04 loss and (consensus loss of $0.05), the company signaled its intent to accelerate investment in the business, especially in building out sales capacity as it continues to view itself as capacity constrained. We note that prior to yesterday’s announcement, management had signaled that after the spike in hiring activity into and immediate following the IPO, hiring was likely to tail off. We therefore view the company’s intent to step up investment as a bullish signal.

On the other hand, Mizuho Securities USA’s Abhey Lamba reiterated a Neutral rating on the shares, and a $30 price target, writing that “Although we continue to like the story, we are waiting for a better entry point as valuation remains high and upcoming expiry of the stock lockup could create buying opportunity”:

At $31, NOW is trading at 48x our 2014E CFFO and 7x our 2014E billings [...] Based on our scenario analysis we believe the company’s revenues could range between $500 million and $1 billion in 3-4 years. It needs to be successful in becoming a platform of choice for IT applications to hit the high end of the range. In our view, it is too early to have significant confidence in the company’s potential to penetrate the platform opportunity. Additionally, the upcoming expiry of the stock lockup should create an overhang on the stock, which could create a buying opportunity. The company’s float could more than double over the next couple of months.

This afternoon, I had a chance to chat with ServiceNow CEOFrank Slootman.

Slootman told me the company’s “growth journey continues to play out” as the company has “more than doubled in size for eight years now.” He said the company is seeing its software, which ostensibly is meant to streamline the activities of an IT group of a corporation, is creeping into many other areas of its customers’ lines of business, such as human resources.

But I asked Slootman what he thinks about the complaints from some investors that the shares of hosted software companies, including both his own, but also shares of Salesforce.com (CRM), WorkDay(WDAY), NetSuite (N), and others, are way over-valued, especially given many make little or no profit at this point.

“This is a very fundamental change in the underlying architecture” of corporate applications, says Slootman. “There’s just a whole group of vendors who are going to displace, replace the older vendors” such as Microsoft (MSFT) and Oracle (ORCL), he contends.

“At the rates of growth that we’re talking about here, the stocks will grow into these valuations at blistering speed. We are not trying to show a profit at all — we could be wildly profitable overnight if we chose to be.”

When I pressed the case, pointing out that for years, bulls said of Salesforce that it would grow into its valuation, and it hasn’t, he replied by re-asserting the primacy of top-line growth and market share growth at all costs.

“We are here to increase the values of our company. It’s not about making money per se, it’s about increasing the value of the enterprise — that happens through growth, that’s the currency. If you know that, you run the company for growth. I think our major shareholders understand that.”

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There are 9 comments

JANUARY 31, 2013 8:31 P.M.

Realistic-Investor wrote:

I'm a ServiceNow customer. Yes, their growth (for now) is very nice. However, my understanding is that they have very little success outside their core ITSM products. The HR application mentioned here is actually extremely trivial and anyhow they want to kill it. Check it yourself on their demo system (after activating the plug in). They are also not making much money from their Discovery and Runbook products - launched a few years ago. Their technology is outdated and their mobile products are a sad joke. The competition around SaaS ITSM is heating up. Soon (this year) they will start to see their growth slowing down and miss targets. The stock will probably drop to the IPO level ($18-$23) or less. I don't have them in my portfolio and I'll not buy any.

JANUARY 31, 2013 8:49 P.M.

Another Realistic Investor wrote:

No doubt the other comment here is NOT from a ServiceNow customer, but from a short seller. Probably one of the two overly aggressive lying kooks on Seeking Alpha. ServiceNow is growing at a blistering pace and the short sellers hate it, spreading false rumors at all costs. ServiceNow is one of the best investments that's come around in a long time and getting in early is key. Do your own due diligence and see why.

FEBRUARY 1, 2013 8:51 A.M.

It NOt about Making Money wrote:

LOL. Give me your money. I can spend it also. If an investor is not looking to make money its called a donation. I can't believe people can listen to these statements and not call them out.

Give me your money, I can have huge revenue in 3 to 4 years. There a statement that means nothing.

FEBRUARY 1, 2013 9:08 A.M.

sktweets wrote:

author has no clue about ubs rating. ServiceNow reiterated as a Sell at UBS

FEBRUARY 1, 2013 10:42 A.M.

Anonymous wrote:

And I have swamp land to sell you, but don't worry it will dry out, and one day be worth the price.

FEBRUARY 1, 2013 12:40 P.M.

Anonymous wrote:

Don’t fall to the “this time is different” trap. Fortune 500 companies have invested billions of dollars into MSFT/ORCL SW. It would be suicidal for the CIO/CTOs to ditch those investments for the new startup vendors such as ServiceNow or WorkDay. Look at the history of B2B companies such as CommerceOne.

FEBRUARY 1, 2013 12:45 P.M.

Anonymous wrote:

Don’t fall to the “this time is different” trap. Look at the history of B2B companies such as CommerceOne. Fortune 500 companies have invested billions of dollars into MSFT/ORCL SW. It would be suicidal for the CIO/CTOs to ditch those investments for the new upstart vendors such as ServiceNow or WorkDay.

FEBRUARY 1, 2013 4:51 P.M.

Growth (Not Cash) is King wrote:

Why would they want to discontinue growth and focus on profit? That's the most near-sighted approach out there and one that stale companies deploy. When you are growing like NOW looks like it has been why wouldn't you invest in that?

PS @Realistic SaaS ITSM is heating up as Fast as Siebel's SaaS CRM :)

FEBRUARY 1, 2013 9:11 P.M.

South Park business model wrote:

1 Startup
2 Growth
3 ...
4 Profit

Its step 3 right NOW guys, riding the wave of growth. Thought you knew?

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.